From the TUC

Why the world needs a wage rise

04 Jan 2010, by in Economics, International, Labour market

Just before Christmas, the International Monetary Fund (IMF) issued yet another call for the global economy to be “re-balanced” – by which they mean that net borrowing/importing countries like the UK and the US need to be encouraged to save more and borrow less, and net lending/exporting countries like China need to be encouraged to spend more and save less. As usual, as my source Peter Bakvis (Washington officer of the global union family) says, “declines to put forward specific measures” among its discussion of policy implications. The real solution, which applies in both types of country, is clear – workers need a wage rise. Here’s why….

The IMF Staff Position Note, Global Imbalances: In Mid-Stream?, co-authored by Olivier Blanchard, chief economist, says is that domestic policies need to change in both type of economy. In the US and the UK, people need to make less use of the easily available credit that fuelled the latest financial crisis (so easily available that they couldn’t pay it back, hence the sub-prime crisis in the US).  In China, on the other hand, people need to save less of their meagre incomes, and spend more on consumer goods.

Here’s why wage rises are the answer in both types of economy.

In the UK and the US, the reason why working people who used to avoid hire purchase and even mortgages are now drowning in loans is because they are poorer than they used to be. Overall, growth over the last generation has disproportionately ended up as profit (in addition to huge City bonuses), with wages taking up an ever smaller proportion. US workers are now, in real terms, worse off than they were in the 1970s (in the UK things aren’t that bad, but profits have still outstripped wages, differentials between people at the top of companies and the average worker have grown enormously, and the average family is now in considerable debt which makes sudden unemployment a worse experience than ever). Wages rises would mean less recourse to debt as a way to maintain standards of living.

In China, where of course real wages are far, far lower, workers save money to pay for ill-health, unemployment, old age and education, because these are, in the post-communist economy, privatised (in reality, even if not in theory). The IMF does go on the record in urging greater levels of social insurance in China, which would release more of the low wages of Chinese workers for spending on consumer products which they are currently producing, but mainly for export. If Chinese workers could save less, and earn more through higher wages, they could buy the goods they produce, boost domestic demand, and grow much faster than currently.

The world economy won’t emerge sustainably from the current recession until the workers of the world get a wage rise. As that meerkat says on the TV ads: “simples”.

3 Responses to Why the world needs a wage rise

  1. Phil Menger
    Jan 6th 2010, 2:32 am

    Hey dude you are in La La land…save what? What wage? I was laid off 2 years ago….I DON’T HAVE NO WAGE TO RAISE!!!!

  2. Owen Tudor

    Owen Tudor
    Jan 6th 2010, 8:01 am

    Phil, I’m sorry about that. Good luck for the future – I hope you find decent work soon.

    To address your point, clearly wage rises are not directly relevant for people without jobs – but they would help, not hinder (there’s obviously a point at which wage rises price people out of employment, but as experience in the UK with the national minimum wage shows, that’s not an insuperable problem).

    The more likely effect of sharing profits more equally (which is what we need) would be to stimulate domestic demand, and therefore increase the number of jobs – meaning that wage rises for workers are good for unemployed people because they create jobs. And, of course, those jobs tend to be better paid than they would otherwise have been!

  3. Tim Worstall
    Jan 10th 2010, 4:28 pm

    “US workers are now, in real terms, worse off than they were in the 1970s”

    Rubbish. Complete claptrap. US real wages are not lower now than they were in the 1970s. And real compensation most certainly is not.

    “In China, where of course real wages are far, far lower, workers save money to pay for ill-health, unemployment, old age and education, because these are, in the post-communist economy, privatised (in reality, even if not in theory). The IMF does go on the record in urging greater levels of social insurance in China, which would release more of the low wages of Chinese workers for spending on consumer products which they are currently producing, but mainly for export.”

    Erm, how does that work? The social insurance still has to be paid for somehow. Presumably through taxation. So the difference between the Chinese worker saving to pay or being taxed to pay for is what on his ability to consume more?